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Question 37: (Audience) How does BRK view union workers versus managers and workers with set contracts (where they are not unionized)?

Buffett: Do not believe in contracts. Don’t want relationships that are based on contracts. They want managers who will be passionate about the business no matter who the owner is

Munger: The BRK model is based on a seamless web of trust. The Hollywood model based on no trust and specific contracts is not their model

Question 38: (Quick) Why not spin off some BRK companies to unlock more value?

Buffett: They won’t be spinning off any companies. They don’t care about increased trading multiples. If they have great businesses they want to keep them for the long. Their structure allows them to move cash within the company with no tax consequences. Can move money from See’s Candy for example to other businesses that have a higher return on invested capital. BRK buys to keep and people know they can trust BRK

Munger: So many spinoffs are just used to produce Wall Street fees. Are not really good for shareholders. Short of some sort of crazy regulation BRK would not split off any divisions

Question 39: (Audience) Do you have any comments on the troubles in the student loan industry?

Munger: There has been a lot of scandal based on certain sales methods. Companies got real cozy with school administrators. In all honesty he does not know much about the business

Buffett: Was approached about a deal concerning Sallie Mae (SLM) and he passed

Question 40: (Sorkin) Are GE and Goldman Sachs (GS) attractive businesses or were the available securities attractive? Does the fact that these companies have a history of managing earnings worry them?

Buffett: Lots of companies have been managing earnings recently. This is not unique to GS and GE. Liked the terms of the deal and the quality of management. Markets were in chaos and it was a really extraordinary period. There was not another alternative for these companies. So BRK jumped in and made attractive deals during this period

Munger: Have done a lots of business with GS and have been very happy with the service they have received over the years

Buffett: BRK does a lot of business with GE. Have bought many wind turbines.In general he is happy with this deal as well

Question 41: (Audience) What happens to BRK’s businesses if the world economy continues to be bad or gets worse?

Buffett: The world system works well. We will live better in the future. The system brings out human potential. Capitalism will have some bad years. But we have not reached our potential. We will continue to move forward at a rapid rate. There are always problems in the world. But this is the only world we have

China used to have a model that took away from people’s potential. Now they have a model that works. We will find more ways to innovate and move forward

Munger: He is cheerful about the economic future: 1. We will harness the energy of the sun; 2. We will turn sea water in fresh water; 3. We will preserve carbon resources; 4. He believes that technological breakthroughs will change energy production

If you have enough energy then you have fewer problems. Solving the energy problem solves mankind’s biggest problem

Question 42: (Loomis) Now that BRK is in control of Swiss Re, should we be worried about the underwriting standards at Swiss Re? Shouldn’t we be wary based on the General Re deal?

Buffett: They have a convertible security that pays 12% and is callable at 120% of par. Convertible at 25 Francs. Expect it to be called

This company’s problems have not come from underwriting. BRK is fine with the 20% quota share they own. Believe it will provide an attractive float. BRK also has a reserve-loss sharing deal in which they would pay out $5B over a certain loss threshold in 10-15 years. In the meantime they have $2B to invest

Question 43: (Audience) How do you develop the right compensation structure in capital intensive subsidiaries?

Buffett: You have to include a factor in compensation that includes capital cost. Can’t just be based on earnings. Would lead to earnings manipulation. Unfortunately boards have had little effect on compensation. CEO becomes a large determiner of his/her own compensation. Often selects the compensation committee. Of the 19 boards Buffett has been on he has been on 1 compensation committee. No one wants a tough guy like Buffett on the compensation committee. Boards do not do enough to monitor and affect compensation. Not every CEO wants a rational compensation structure.

Believe that there should not even be a separate compensation committee. The whole board should be involved. The board rarely acts enough like owners. Has gotten better though over the last few years. But off a really low base

Munger: There is often a club-like atmosphere. Directors are liberally paid and they have the incentive to keep CEO pay high as well. Creates a mutual pay raising climate

Buffett: Thinks 100 page proxy statement are absurd. If it takes that many pages then something is very wrong. When his/her personal compensation is important (financially) to an individual director then he/she is not likely to argue with the CEO

Munger: A man/woman who has a lot to lose if he/she loses his/her office or position is not likely to be independent

Question 44: (Quick) What is the worst case scenario for BRK’s insurance business?

Munger: A catastrophe loss that costs $2-$3B pretax. But he wouldn’t trade their insurance business for any one else’s. Even that big a loss would not impair the company over the long run

Buffett: Would pay 3-4% of a $100B catastrophe based on their current share. The kind of scenario in which this could occur would be a situation in which there was so much inflation that people became unhappy about their daily purchases and the government was forced to nationalize businesses. This is a very low probability event but it is not impossible

Question 45: (Audience) How should BRK shareholders outside the US hedge against a slide in the USD?

Buffett: Euro Dollar is an easy thing to hedge if you want. Not as easy with other currencies though. BRK will continue to do things that make sense. They will own companies that make money outside the US through direct and indirect means. They don’t have a goal about a certain percentage of earnings coming from abroad. They don’t wake up and think they should put more money in a specific country. They look at deals as they present themselves

Munger: Modern capitalism is messy and has defects. There is plenty right and wrong with all models

Question 46: (Sorkin) How do you look at temporary or permanent layoffs based on short term changes in the economy?

Buffett: Things can change very fast in the economy. BRK’s brick plants are closed now. But won’t permanently contract. But the Buffalo News business may never come back as the textile business never did. If business changes are material then you must change the model. Have to lay off as you see fit when your competitors are. Firms usually err on the side of waiting too long and you never like doing it

Munger: Some businesses have a shared hardship model in which layoffs get delayed. But you can’t operate each plant at 50% to avoid closing the weakest one

Question 47: (Audience) How can shareholders work to help curb compensation?

Buffett: The AIG bonus scandal has had a huge impact on the government and the public. People are enraged. No statute will be able to make constituents 100% happy. Clinton era compensation bill was terribly counterproductive. In the end the shareholders paid when companies could not deduct more than $1M of compensation for executives and this reduced earnings. Led to a lot of people hiring lawyers to try to get around the tax laws. Led to longer proxy statements as well. Suggested repealing this Clinton era bill. If the money management companies spoke out on just the most egregious cases then they could embarrass people and behavior would likely change. Restraining factor is not present now though. Consultants inflate compensation even more. No one wants to be in the bottom quartile of pay

Munger: He is not optimistic about money managers changing their ways. A money manger who is making $20M a year managing a fund is not likely to try to curb other executives’ pay. It would be like throwing stones in a glass house. Pension funds are also dominated by liberals that will not allow the values to change

Question 48: (Loomis) How does BRK uate potential managers?

Buffett: Usually buy companies that have great management teams in place. You have to ask yourself whether or not these people will feel the same way about the company the day after the deal. What do they do when managers get too old and lose their edge?. BRK has no mandated retirement age (probably because it would force Mungerout). Decisions to remove older managers are tough on Warren and Charlie. Have been really slow on these in the past. This is the only part of the job they do not like. Want to find people who love their businesses. Believe they can spot that in people

Question 49: (Audience) What is Buffett doing in his own portfolio?

Buffett: Not buying as aggressively as he was in 1974. That was the best period ever.There was a different interest rate situation then. Country is not in as much trouble as it was in 1974. Has recently bought some equities and bonds. Likes when things get cheaper. Buy things on sale when you can get a lot for your money. Said he spends 99% of his time thinking about BRK and only 1% on his portfolio

Munger: In general when stocks go down by 40% they are more attractive. Plus, interest rates are low now as well. This is not as bad as 1974. In 1974 he knew it was his time to buy. Too bad he didn’t have enough money

Question 50: (Quick) How do they identify capital intensive businesses that overstate earnings because they understate actual depreciation?

Buffett: Utility earnings come from regulated ROE. They are more afraid of non-utility companies. You don’t get rich or poor on utilities. But inflation could end up affecting the utility business. A lot of moats have been filling up with sand recently. Newspapers and TV stations have lost their moats

Question 51: (Sorkin) Is there a succession plan for Ajit in place? Considering the size of the re-insurance business, is it risky not to have a plan in place?

Buffett: It is impossible to replace Ajit. If something happened to Ajit they would have to limit the amount of capital, risk and authority of who ever came in after. The authority comes with the person, not with the position. Enormous damage can be done in the insurance business with a pen so you have to be careful who you give that pen to

Buffett: talks to Ajit every day because he likes to hear about what Ajit is up to. Not because Ajit needs him

Munger: The fact that it is true that a fool may eventually run a business (referring to the idea that you should find a business that a fool can run because eventually a fool will run it) does not take away the importance of finding a company that is managed by incredibly capable people

Buffett: Preliminary Comments on Q1 2009 Q1 earnings of $1.7B versus $1.9B in Q1 2008. Underwriting profit was up. Float was up $2B as a result of a March transaction with Swiss Re (this is long duration float). Utilities’ earnings were down. Constellation Energy (CEG) stock was down during the quarter and there was a payment to buy Mid American options that hurt earnings

All of the other businesses were down as well. Insurance and utilities should be better the rest of the year

He is not expecting the others to do well

$22.7B in cash. They then spent $3B on the Dow Chemical (DOW) deal the day after the quarter ended so cash was just about $20B as of 4/1/2009

BV/Share was down. CDS contracts were down even more from Q4 as a result of the market turmoil